Federal Reserve Overhauls Its Approach to Supervision
In Short
The Situation: Federal Reserve ("Fed") Vice Chair for Supervision Michelle Bowman has expressed a desire to sharpen the focus of the Fed's supervision of financial institutions.
The Result: The Fed's new Statement of Supervisory Operating Principles ("Statement") released November 18, 2025, significantly streamlines the focus of examination priorities for Fed examiners, both for bank holding companies and Fed-supervised banks.
Looking Ahead: Fed-supervised institutions should expect a recentering of examination and supervision on material financial risks and a reduction in "check-the-box" compliance requirements in the supervisory process.
The Statement refocuses examiner priorities, both for banks and bank holding companies, on material financial risks to the institution. It requires clear, specific supervisory criticisms written in a way that would allow "a person of ordinary intelligence" to understand the deficiency and how a financial institution can remedy it. The Statement also requires a more efficient path to remediation and issue closure, including greater reliance on internal audit.
The ultimate result should include more targeted exams, less duplicative supervision, clearer paths to closures of issues raised by supervisors, and, critically, more focus on direct financial risks to the business of banking. Examiners will be required to focus on risks that affect safety and soundness and avoid overemphasis on "check‑the‑box" procedural issues. In particular:
- For bank holding companies and their organizations supervised by the Fed at the organizational level, examiners will be required to rely "to the maximum extent possible" on the work of primary state or federal supervisors for depository subsidiaries and tailor "intensity" of examinations to size, complexity, and systemic importance.
- For state member banks, Fed examiners will work jointly with state supervisors, leveraging alternate-year programs where applicable.
- Large-institution horizontal reviews—comparisons of financial institutions across peer groups—will proceed only when benefits outweigh costs, and assessments will be measured against supervisory expectations, rather than "best practices" within the peer group.
Clearer findings and faster closures. With respect to formal regulatory criticisms (MRAs/MRIAs), examiners must clearly specify the deficiency, the non‑deficient end‑state (i.e., how a financial institution can remedy the problem), and respond promptly to institution questions seeking clarity.
Where the internal audit function of a financial institution is rated satisfactory on an exam, and internal audit has confirmed that a regulatory deficiency has been remedied, examiners should rely on such an internal audit validation to close MRAs/MRIAs and enforcement requirements without delaying closure for long‑term sustainability testing or adding unrelated "capstone" reviews; performance will then be monitored post‑closure.
Liquidity. Examiners should not discourage financial institutions from including FHLB capacity in liquidity planning and reporting; nor should they require prepositioning assets at the Fed discount window as a condition of access.
Ratings. Composite ratings should reflect overall condition and material risks without overweighting management components. Rather, all components of the CAMELS ratings should receive weight based on materiality to the institution.
Why this matters. Financial institutions should expect more focused exams, fewer duplicative reviews, and clearer remedial targets. Defining concrete, testable remediation end‑states should speed closure of outstanding regulatory issues—especially where internal audit validation is strong—while supervisors focus more deeply on material risks and less on process, procedure, and documentation issues.
Internal dissent at the Fed. The reasoning behind the Statement is not universally shared by Board members. Former Vice Chair of Supervision Michael Barr gave a speech on the day the Statement was released that acted as a dissent to the Statement. He argued that the overhaul to supervision that the Statement represents would increase potential risks to financial institutions and the financial system. In particular, among other things, he suggested that the Fed's credit ratings framework will be modified in a way that diminishes its strength and credibility, and that reducing the time and resources devoted to supervision is likely to weaken accountability for poor practices.
Two Key Takeaways
- Institutions should: (i) recenter exam readiness on top material risks and evidence of the effectiveness of internal controls to address those risks; (ii) plan responses to responses MRAs/MRIAs that demand specificity and measurable end‑state criteria, and plan for internal audit validation and to ensure that audit functions receive satisfactory ratings; and (iii) coordinate with primary supervisors to reduce duplication, refresh liquidity playbooks to reflect the Statement's approach to FHLB and discount window liquidity, and reassess drivers of various rating components against material risk to the institution.
- National banks and state non-member banks should expect directionally similar changes in focus in their supervisory and examination processes, whether the OCC and FDIC follow with similar guidance.
